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Las Vegas Sands Still Dominating on Cotai Strip

Results may not have hit Wall Street's expectations, but Las Vegas Sands is still gaining share on the Cotai Strip in Macau.

It seems like every time Las Vegas Sands(NYSE:LVS) reports good earnings in one part of the world, there's also a red flag in another. That was the case in the second quarter when Macau performed fairly well, even if it didn't meet Wall Street's expectations, but Singapore saw a massive drop in demand.

Macau continues to outperform When looking at Las Vegas Sands' performance in Macau, it's important to keep the entire market in perspective. In the second quarter, gaming revenue in Macau was up 5.5% from a year ago but down 11.1% sequentially, so Las Vegas Sands' casinos need to be taken in that context.

The Venetian Macau continues to perform well; it grew revenue 15.4% to $1.03 billion and EBITDA 11.4% to $402.1 million in the quarter. A 40.2% jump in mass market play drove the results.

Gaming floors in Macau are still packed with gamblers. Source: Las Vegas Sands.

Similarly, Sands Cotai Central saw revenue rise 34.4% to $784.8 million and EBITDA jump 70.4% to $249.0 million on the back of a 53.2% increase in mass-market play. Clearly, both of these resorts took share in the quarter, largely because they're in the center of the Cotai Strip, which is where the mass market is going.

Four Seasons Macau and Sands Macau were a bit more of a mixed bag. Four Seasons' revenue was down 16.6% due to a 43.2% drop in VIP play and Sands Macau's revenue was up just 6.2% because of a 20.1% drop in VIP play. In both cases, mass-market play was up.

The trend of revenue heading to Cotai is consistent with what we've seen for years, and Four Seasons Macau will often be very volatile. What this means for competitors like Wynn Resorts(NASDAQ:WYNN) and Melco Crown(NASDAQ:MLCO) is that we'll likely see Wynn's revenue fall and Melco's rise. Wynn is highly reliant on VIP players and is on the Macau Peninsula until its Cotai resort is completed; Melco Crown is a neighbor of The Venetian Macau and Sands Cotai Central, so it'll likely benefit from mass market trends.

Macau is still about location and Las Vegas Sands is winning that battle, even if results fell short of analysts' lofty expectations.

Singapore gets lucky Results from Marina Bay Sands, which is one of only two casinos in Singapore, were also a bit mixed. Revenue was up 8.8% and EBITDA rose 17.6% to $417.8 million, but VIP play was down 27.3% and mass market play fell 4.9%. For results to rise, Las Vegas Sands had to have a very lucky quarter, particularly from VIP players.

On the conference call, Sheldon Adelson said one of the reasons VIP play was down is that they're giving less incentives, particularly credit, to customers. That'll make the revenue they do generate higher-margin but will also hurt the top line. But we've also seen occupancy exceed 99% in Singapore again and room rates at $409, so the resort is still in very high demand.

We've seen that Singapore's gaming play can swing wildly quarter to quarter, and so can luck, but long-term the resort should generate $1.5 billion to $2.0 billion in EBITDA annually. That's great profit, but I also wouldn't expect the same kind of growth there that Las Vegas Sands might see in Singapore.

Outperforming but still expensive Las Vegas Sands is clearly taking share in Macau, as it should right now. That will likely change when new resorts from Wynn Resorts, Melco Crown, and others open in 2016 along with The Parisian for Las Vegas Sands. Until then, it's the best show in town.

The problem I have jumping into shares today is simply valuation. Las Vegas Sands' enterprise value is 12.7 times its EBITDA, and with Macau's growth slowing and Singapore flat, that's a high price to pay. If shares fall to an EV/EBITDA multiple below 10 I'll be interested, but until then I'll stay out of the stock, despite great operating results.